The UK’s largest energy suppliers are about to offer long-term contracts without knowing what regulations will apply after Brexit, creating the risk of higher costs for households and companies, an industry body said.
From October, Britain’s four biggest electricity producers — EDF, RWE, Scottish Power and SSE — will set the price for their winter 2020/2021 contracts to supply smaller UK providers, as required by UK regulator Ofgem.
But the UK could crash out of the EU without a deal, potentially ending participation in the EU’s internal energy market and emissions trading scheme.
If the UK reaches a deal, the agreed transition period only runs until December 2020, leaving companies uncertain whether the EU’s carbon pricing and other rules will apply to them in 2021.
In a white paper, the UK government said it would “consider its options” over energy regulation after the transition.
“Pragmatism just says that [the current situation] continues,” said Lawrence Slade, chief executive of Energy UK, the power producer industry association — adding there would be “significant value to both sides to maintain the status quo”.
Ofgem is reviewing its October deadline, but Mr Slade said companies would still price in the uncertainty. “Suppliers buy their energy days, months and years in advance,” he said. “The lack of certainty around the future carbon-pricing mechanism as well as the rules underpinning the cross-border trade of electricity and gas create risk, and risk has a price. This situation is likely to create cost pressure that will feed through to customer bills.”
Tor Mosegaard, head of power markets at Danske Commodities, said: “When there is such a big uncertainty lying out there then there is a lot of risk that traders need to mitigate around . . . The risk premium is likely to rise.
“The biggest UK companies are exposed even more to this political risk as they need to make decisions now before they know the outcome.”
A UK government spokesperson said it was seeking “broad energy co-operation with the EU” such as participation in the internal energy market and the EU’s emissions trading scheme (ETS). But the white paper also mentioned that leaving the internal energy market was another option.
“There undoubtedly remains concern around what happens next . . . there is a concern whether people understand the scale of some of the issues — in particular the ETS and the UK’s membership,” Mr Slade said.
The EU’s ETS requires companies in most industries to buy permits for their carbon-dioxide emissions — the current market price is around €20/tonne.
Mr Slade said: “We need some form of carbon pricing and it is not like you can create a carbon pricing overnight.” He said if the UK stayed in the EU’s scheme for the next phase, which runs to 2030, it would give the industry “the luxury of time”.
“If you leave now, you have no time to put something in place that is going to avoid unintended consequences,” he said.
The EU’s internal energy market has become increasingly connected as member states have built physical links, established common rules for efficient trading and linked their national wholesale energy markets. The changes mean companies can more effectively balance demand and supply across the system.
Britain currently trades electricity with France, the Netherlands and Ireland via 4.6GW of existing submarine interconnectors. An additional 12GW of links are under-construction or planned by 2023, according to Phil MacDonald of Sandbag, an environmental think-tank, who believes the new connections will be built as “the economic reasons for doing so will remain whether we Brexit or not”.
“Traders, markets and network operators will make it work — power and gas will still flow [over interconnectors after Brexit],” said Mr Slade. “The question is over how effectively the trade can operate and if you have a dispute, how will that be sorted out.”
Additional reporting by David Sheppard.